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* Watchdog sees risk of unfair profit maximisation
* FCA opens competition probe into wider retirement market
* FCA says not clear yet if any enforcement action needed
* Pensions campaigner says watchdog must act straight away
By Huw Jones
LONDON, Feb 14 (Reuters) - An important part of Britain'spensions market is disorderly with insurers maximising profitsand failing to give the best deal, according to a watchdogreview that drew criticism for ruling out immediate reforms.
The Financial Conduct Authority's review of annuities, wherea pot of money saved over a working life is swapped for anannual income until death, found too little competition and saidthose with the smallest pension pots were worst hurt by havingonly a handful of annuity providers to choose from.
The findings come at a time when the government wants morepeople to save for their retirement as they live longer andnational coffers cannot afford the generous state pensionsneeded to maintain a decent standard of living into old age.
About 420,000 annuities worth 14 billion pounds ($23billion) are sold each year with each purchase irreversible,depriving people of the right to shop around that would leavefour out of five people better off by 71 pounds a year on anaverage pension pot of 18,000 pounds.
About 168,000 of the annuities are bought from the insurancecompany a customer has saved with, and the company makes farmore money out of them than from annuities sold to savers fromelsewhere. The FCA said there was a risk that insurers would tryto unfairly migrate their savings customers to their own annuityproducts to maximise profits.
Many annuity providers do not offer better terms to peoplewho are ill or smoke and are likely to live for fewer years thantheir healthier peers. Annuity providers make the most moneyfrom people who die young, since the annuity payments cease ondeath. The review also found poor practices on all annuitiescomparison websites.
"All together this paints a picture of a disorderly market,"FCA said.
Otto Thoresen, director general of the Association ofBritish Insurers, said the insurance industry had addressed manyof the issues raised but acknowledged more progress was needed.
"The market isn't working as well as it could... Werecognise that our industry can do more to make the market workeffectively for customers," he said.
Pensions Minister Steve Webb said in January that annuities"need a rethink" as they were designed for a world in whichpeople lived for 10 years after retiring, not 30 years.
The minister is to propose draft legislation, as part of his"defined ambition" pension reform programme, that would allowcreation of collective private pensions in which savings wouldbe pooled into funds that would provide a retirement income,negating the need to buy an annuity.
NO BIG CHANGES YET
The FCA was launched last year to better protect consumersand end a stream of mis-selling scandals spanning three decades,notably of payment protection insurance.
The FCA said it could not say if there had been mis-sellingin annuities, a sector dominated by big insurers like StandardLife, Aviva, Prudential and Legal & General.
David Barral, chief executive of Aviva UK and Ireland Life,welcomed the review: "We want the FCA to identify all thoseareas where consumers get less than they should on theirretirement income."
He said the FCA should investigate insurers taking advantageof savers' inertia and brokers charging excessive commissions orkeeping customers in the dark about what was available on theopen market.
The watchdog said it would study sales practices and reportin the summer, open its first competition probe into the widerretirement market and require changes to comparison websites.
Watchdog officials said it had not ordered immediate changesto the market because pensions were a complex topic and moredata was needed before deciding if any rules have been broken orwhether major market changes are needed.
"We are not yet in a position to say if firms are operatinginappropriately, and we will look into all of these aspects overthe next six months," said Nick Poyntz-Wright, FCA director oflong-term savings and pensions.
Poor sales practices can trigger fines. A record 28 millionpounds fine was levied on Lloyds for encouraging staffto sell 2 billion pounds of products customers did not need.
The FCA said any big reform would not come until at leastafter its review into annuities sales practices is published inthe summer, when it will also have preliminary findings from itscompetition probe.
"I am certainly disappointed that the FCA is not actingimmediately - every day that goes by risks more people buyingthe wrong product for life and never being able to change it,"said Ros Altmann, a pensions campaigner and former DowningStreet adviser.
"This market is failing customers and so is the regulator."
The competition probe will be completed by early 2015.Structural changes appear inevitable as FCA officials saidrequiring more disclosures would simply drown customers in moreoff-putting jargon.
